Mark Ellem, head of education for Accurium, said the Reserve Bank of Australia has now updated the safe harbour interest rates for limited recourse borrowing arrangements (LRBAs) for the 2025–26 income, which subsequently means advisers and SMSF trustees need to review borrowing arrangements within funds to ensure they meet all regulations.
“When an SMSF borrows to acquire an asset under an LRBA, section 295-550 ITAA 1997 requires loan terms to be consistent with an arm’s length dealing. The ATO’s Practical Compliance Guideline PCG 2016/5 sets out the ‘safe harbour’ terms for related party LRBAs,” Ellem said.
“As long as your SMSF structures LRBAs in line with these terms, the ATO will accept that the arrangement is on arm’s length terms, ensuring that the NALI provisions do not apply purely because of the borrowing arrangement.”
He continued that a key safe harbour requirement is the loan interest rate. For real property assets, the interest rate is based on the RBA’s Indicator Lending Rate for banks providing standard variable housing loans for investors, using the May rate preceding the income year.
If the asset is a collection of stock exchange-listed shares or units, the relevant rate is the May figure plus 2 per cent.
Following the RBA update, the LRBA Safe Harbour Rates for 2025–26:
· For LRBAs over real property: 8.95 per cent for the 2025–26 income year, down from 9.35 per cent in 2024–25
· For LRBAs over listed shares or units: 10.95 per cent for the 2025–26 income year, down from 11.35 per cent in 2024–25
Ellem said if an SMSF’s related party LRBA uses the ATO’s safe harbour terms, it must update the loan repayments to reflect the new interest rate from the July 2025 payment.
“Review your loan schedule to ensure repayments are recalculated in line with the revised rate.”
“There is one important exception: the safe harbour rules permit the interest rate to be fixed at the start of the LRBA, for up to five years for real property or three years for share/unit-backed arrangements. If your LRBA is within such a fixed rate period that commenced from the start of the loan, there is no requirement to adjust repayments until that fixed term ends.”
He added that SMSF trustees and advisers should assess all LRBAs with related party loans and the safe harbour rules that are being relied upon to ensure interest rates reflect the 2025–26 safe harbour rate, unless they are under a valid fixed rate period.
“They should also now update loan repayment schedules where necessary, document all changes and retain evidence of compliance for audit purposes.”
“If trustees are unsure of what they need to do, they should seek specialist advice to mitigate compliance risk.”
